After a somewhat subdued 2020 holiday season, many people are looking forward to going all out in 2021. In fact, a recent MassMutual survey found that many consumers intend to spend more on this year’s holidays than last.
Not surprisingly, some consumers will use credit cards to cover their purchases. And that could certainly work to their benefit.
Charging holiday expenses on a credit card could allow consumers to rack up cash back and other rewards that could help offset the cost of those purchases. Plus, there are certain protections consumers can enjoy when they use their credit cards in stores and for other holiday spending, like airfare.
Some credit card companies offer purchase protection so that if goods become available at a lower cost, consumers don’t get stuck paying a higher price. And, credit cards can protect consumers in situations where merchants won’t accept returns for defective items or those that don’t match their initial descriptions.
Charging airfare on a credit card can also result in major perks. For example, many travel reward cards offer money-saving benefits like free checked bags to cardholders.
But while it does pay to make holiday purchases with credit cards, the aforementioned survey uncovered one disturbing trend. Of those who plan to pay for holiday purchases with credit cards whose balances will be carried forward, 59% think they won’t be able to pay off that debt for at least six months. And that’s a mistake that could haunt them.
The danger of holiday debt
Racking up a credit card balance during the holidays and carrying it for six months or longer means automatically paying more for purchases and expenses in the form of interest. That’s akin to throwing money away.
Furthermore, consumers who accumulate credit card balances and don’t pay them off immediately risk credit score damage. That’s because credit utilization is one factor that goes into calculating credit scores, and it measures how much available revolving credit consumers are using at once. A utilization ratio above 30% will negatively impact a credit score, making it harder to borrow money affordably.
Consumers who plan to take out a big loan in 2022, like a mortgage, should be especially careful to avoid racking up credit card debt late in the year. Even a modest credit score drop could result in a higher interest rate when borrowing on a long-term basis.
Avoiding holiday debt
Avoiding holiday debt doesn’t have to boil down to leaving credit cards at home and paying for everything in cash. There’s much to be gained from shopping with credit cards during the holidays, and those are benefits consumers shouldn’t be quick to give up.
Rather, avoiding debt could come down to setting a budget ahead of time. Consumers should see how much money they have available to spend for holiday purposes and pledge to stick to that total.
Racking up a large credit card balance at the end of the year is an easy way to close out the holiday season on a sour note and start the new year at a financial disadvantage. Consumers should make every effort to avoid going that route — especially if they intend to increase their spending.